What are the challenges you face both on the Triago fundraising side and on the Palico side of your businesses?
On the fundraising side, people say it takes about 21 months on average to raise a fund. That number is really the combination of six months on one hand and basically infinite months on the other. The Triago team’s biggest challenge is understanding the implications of that bifurcated market and then accurately advising clients on strategy. Palico’s challenge is getting people to understand that there is a new way of making connections via a self-help, regulated online marketplace that’s for everyone. Those who have actually tried it – and there are already 1200 entities in 62 countries – love it. But it’s new, so a lot of people are working the old fashioned way and that’s fine.
How might the industry change as investors add private equity exposure or increase it?
Everyone is now putting money into private equity. We’re even talking about retail investors now. The bad news for private equity groups is that the biggest source of new capital – sovereign wealth funds and large public pensions – are increasingly going direct. This is the case for Qatar Investment Authority, Abu Dhabi Investment Authority, the Canadian Pension Plan Investment Board and others. They won’t replace traditional fund investment by direct exposure completely, but they will probably allocate a lot of money to deals and only invest with private equity groups that can bring them good ideas and deal flow.
Do you expect the 2 and 20 model to change anytime soon?
If you’re an LP and you have the choice between a great team that will charge you 2 and 20 and an average team charging 1 and 10, you’re going to go for the 2 and 20. To successfully fundraise, you need to be a good group, and they can pretty much ask for what they’ve been asking for over the last 10, 20 and 30 years, with just minor changes at the margin.
Where do you see the fund of funds model going in the future?
You will see further mergers in the fund of funds business because some of these guys have lost their clients. Many LPs now are investing directly into funds and are avoiding the fund of funds stage. We’re seeing some big funds of funds that are great everywhere except in say Asia, and so they’re looking for a group to buy over there. Some funds of funds want economies of scale. Whether you’re managing $10 billion or $50 billion means pretty much the same thing as far as headcount. Also, as LPs look for low cost ways to increase their firepower, some public pension funds, notably in the UK, are exploring the idea of essentially becoming funds of funds for smaller public schemes. That’s an idea that may gain traction.
What are some of your predictions for the private equity market in 2014 and 2015?
2014 and 2015 should be pretty good years on the investment side because there will be less competition for deals. Why is that? Because some of the people that have been trying to raise money for a year or two and that are failing – or have failed – won’t be around. The second reason, which is a bit more technical, is that most of today’s dry powder was raised in 2007 and 2008 for a five-year investment period. That means that most of the hot money is going to vanish within the next three to 15 months.